Human Capital

The Economics of Reading, ’Riting and ’Rithmetic

By ALLEN R. SANDERSON

Although there are certainly some discussions of education and skill
acquisition in the writings of early economists from Adam Smith
forward, the systematic examination of education (that is, investments
in and contributions of training and experience in the workplace)
really began about 50 years ago with the work of Jacob Mincer at
Columbia University and my colleague and Nobel laureate Gary Becker at
the University of Chicago. Becker’s 1964 volume, Human Capital, was
“square one” for students of Mincer, Becker, and others whose
pioneering research has led to significant contributions to our
understanding in this general field.
The world “capital” or investments in equipment and other resources
to produce output, is long-standing and hardly raises eyebrows. But
when economists began to refer to investments in “human capital” and
apply it to various aspects of education and labor markets,
“how-dare-you” fur began to fly in some quarters. However, nowadays the
term has settled into everyday language, including renaming what had
long been “personnel departments” at firms and agencies as departments
of human resources, or simply HR.
So, after a half-century of devoting energy to the topic, what do we know about the economics of education?
First, the financial returns to investments in people are
substantial. The private monetary benefits compare very favorably with
other investments, and they have increased substantially in recent
decades. For example, compared with his or her peer with only a high
school diploma, someone with a college education will earn about twice
as much over a lifetime. The gap is even greater in comparison with a
high school dropout or GED holder. Furthermore, unemployment rates for
college graduates are 50 percent lower than those with only a high
school diploma, and two-thirds lower in comparison with the high school
dropout population.
One contemporary thorn is the wide and increasing gap between skilled
and unskilled workers in our society and its obvious contribution to
one of our major societal issues today—income inequality. Some might
attribute it to the loss of manufacturing and reliance on “McService”
jobs, but in a high-tech world the demand for talented, highly-skilled
workers in the service sector is enormous. Think Microsoft, Intel,
Amazon, Google. The impact of increased immigration, legal or illegal
to income inequality is negligible compared with the basic fact that
unskilled workers are simply disposable in the modern world.
In addition to the financial rewards, there are also non-monetary
benefits that accrue to the highly educated individual, including
better health, a longer life expectancy, a greater appreciation for
good literature and the arts, and perhaps a more rewarding life.
In addition to these gains for the individual, society also has a
stake in these human capital investments—a better-informed citizenry,
lower crime rates, fewer illegitimate births. And at the macroeconomic
level, education is a key ingredient in producing economic growth and
development across countries. Schooling increases productivity and
advances and helps tame technological change, thus generating gains in
per capita income and one’s material standard of living.
Given the importance, then, of education in many dimensions and at
all levels, and the rather dismal performance of American high school
students in mathematics and science in comparison with their
international peers, it is no wonder that the United States continues
to grope toward better outcomes in K-12 classrooms. Dissatisfaction
with the current state of affairs, especially in urban schools, drives
the support for voucher systems, charter schools, merit pay for good
teachers, paying students to stay in school, both the Bush and Obama
educational initiatives, and other tweaking.
The most recent research indicates that the observed white-black
achievement gap in high schools today is the result of activities and
interventions in the 0-4 range, not in the K-12 years; thus schooling
and its alternative structure may have less importance than families
and good public policy in early human capital formation.
Once cause for concern, or even alarm, in the years ahead is the
slowing of education attainment among our young people in terms of both
graduation rates and college attendance. Over the 20th century, the
American system of education—with all its faults, the mass education
and non-elitist nature of it—helped make us the richest nation on earth.
If we now surrender that leadership and those gains as we stand on
the educational sidelines and watch our brain gains become brain
drains, perhaps we should at least learn the words for “human capital”
in Chinese!